The Emotional Cost of a Concentrated Position
Concentration is defensible on the arithmetic and expensive in ways the arithmetic does not capture.
There is a reasonable argument for concentration: if you have genuine conviction in a small number of positions, spreading capital across things you believe in less dilutes the good ideas.
The argument is sound and it omits a cost that does not appear in any calculation.
What a concentrated position actually does to you
It occupies attention disproportionately. A position that is a large share of your net worth is present in a way that a small one is not. Not as a thought you have, as a background condition.
It makes every piece of news personal. Sector news that would be interesting becomes threatening. Reading changes character, from assessment to defence.
It removes the option to be wrong cheaply. With a small position, discovering the thesis was mistaken costs a modest amount and a lesson. With a concentrated one it costs a substantial share of everything.
It compounds into other decisions. Career risk, housing decisions, and the willingness to take other kinds of risk all change when a large share of your assets is in something volatile.
The asymmetry the arithmetic misses
The expected value calculation treats a position twice as large as producing twice the outcome.
It does not account for the fact that the larger position changes your behaviour, and the behaviour change is in the direction of worse decisions: more checking, more defensiveness, more susceptibility to the month-three argument during a drawdown.
A position sized where you behave well will outperform a larger one where you do not, and the difference is not in the asset.
My own version
I have run concentrated and I have run diversified within the same asset class, and the diversified version produced better decisions and worse returns.
I want to be honest that those are different things. The concentration was correct on the arithmetic in that period. It was also the period in which I checked most often, argued most defensively, and came closest to selling from exhaustion.
The compromise I use
A stated ceiling, and running at roughly half of it by default.
That is not optimal under any expected-value calculation. It is optimal under the constraint that I want to behave the same way during a seventy percent decline as I do now, and I know from the record that I do not, above a certain size.
The test
Would I behave the same way if this position halved tomorrow?
Not “would I be upset”, which is a given. Would my reading change, would my checking frequency change, would the arguments during a drawdown find more purchase.
If yes, the position is too large, regardless of how good the idea is. The idea has to survive contact with the version of you that holds it, and that version is created by the size.
Operationally the ceiling is enforced by the quarterly rebalance, executed through a platform I can leave a standing order on so that trimming never becomes a project I defer.
This is a personal account of holding through market cycles. It describes what one person did and why. It is not a recommendation, and past cycles do not predict future ones.